STX, WDC Cut to Sell at Citi; Estimates Too High Amidst PC Slowdown

By Tiernan Ray

Citigroup‘s Joe Yoo today cut his ratings on hard drive and storage technology developers Seagate Technology (STX) and Western Digital (WDC) to Sell from Buy, writing that there is a chance of 25% downside to current estimates for the companies this quarter given what may be drastically lower volume of drive shipments.

Yoo cut his Seagate target to $25 from $37, and cut his Western Digital target to $32 from $53.

Drive volume this quarter may be only 140 million units in total, versus an outlook from the two companies of about 150 million to 155 million, mostly because Microsoft‘s (MSFT) forthcoming Windows 8, which goes on sale October 26th, will be a “non event” in the context of lots of cheap tablet computers:

Our recent work suggests that the struggling PC market could get worse near-term, and the bar has not been set low enough for next year. On 4CQ12 expectations, while Taiwan ODMs are guiding laptop builds to be up 5-10% qoq due to Win 8 launch, we expect qoq growth to be more flattish given our view that Win 8 launch will largely be a non-event for traditional PCs, while difficult to ignore the plethora of tablets (eg. iPad Mini) that will flood the market during year-end selling season. For CY13, Citi currently forecasts PC units to decline by 1%, well below consensus view of mid-single digit growth.

Yoo also thinks sales of enterprise hard disk drives “plunged” last quarter, falling perhaps 27%, quarter over quarter, versus the five-year average increase of 7%, according to data from Trend Focus.

Longer term, Yoo has “a more positive view of the sector longer-term given that HDDs are a play on data storage growth, rather than mere PC growth.”

Yoo cut his Seagate estimate for this calendar year to $16.3 billion from $16.5 billion in revenue, and to $7.95 per share in profit from a prior $8.51.

For Western, his estimates go to $15.3 billion and $9.99 in EPS from a prior $15.84 billion and $10.68 per share.

Seagate shares today are down 20 cents, or 0.7%, at $28.05, and Western shares are down 86 cents, or 2.4%, at $35.73.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.